Wednesday, October 5, 2011

The chart below was created using data from a table within a recent Michael Pettis newsletter (his great blog China Financial Markets will produce a condensed version of the newsletter within a week or so) that outlined the composition of China's GDP by year (broken out by C, I, G, and NX) and multiplying the component percents by the size of the Chinese economy for each year.

What the chart shows is the remarkable growth across all the components, but the unreal growth in investment which now makes up almost 50% of China's economy (the fact that consumption grew by 75+% likely allowed for the other components to grow even faster as the citizens saw their lifestyles dramatically improve, allowing for the flexibility needed with central control by the government).

But, much like the exponential growth in China's currency holdings this investment growth is not sustainable, especially in a world that appears to have more than enough supply for the current (and waning) level of aggregate demand globally. So this begs the question... if there will be a rebalancing away from investment, will it happen due to the pace of Chinese consumption simply increasing (i.e. will China "save" the global economy) or will investment growth (and the Chinese economy) slow substantially?

I'll likely have a post tomorrow or Friday on just that. Our consumption is up only 18% the past decade, but investment is down 6%. Seems like they are "stealing" our production capacity due to a cheap currency and some horrible policy aimed at maximizing corporate profits at the expense of the average worker...

The amount of fixed asset investment is not really the question is it? Its the RoI on that investment that matters. At what point does the incremental investment not help drive the other components - trade looks pretty played out (customers certainly not so willing or able) so the salvation of the economy lies in boosting that red line...

I must agree with penny stocks on this subject. Enormous capital misallocations have ugly consequences when they eventually come home to roost. China has yet to face these consequences, yet collapse remains a possibility in my view.